EU Weighs Repo Rules If ECB Plan Fails to Boost Transparency

By Jim Brunsden -
May 2, 2013

The European Union is considering
legislation to boost oversight of repurchase agreements should
moves by the European Central Bank to set up a transactions
database fail to allow regulators to discover risks building up
in the financial system.

The European Commission is “closely following” the ECB
initiative, which involves setting up a central repository to
collect real time data on repo trades, according to a commission
document obtained by Bloomberg News.‘

The commission “will assess whether transparency at EU
level has improved, while reserving the right to take
legislative measures to remedy the situation,” according to the
undated document.

Repo trades, contracts in which one investor agrees to sell
a security and then buy it back at a future date at a fixed
price, are being scrutinized by the EU as part of a wider push
to rein in possible threats to financial stability from so-
called shadow banking. Securitizations and the business model of
money-market mutual funds are among other potential risks in the
EU spotlight.

The Financial Stability Board has estimated that the global
shadow banking system was worth $67 trillion in 2011, with EU-
based activities accounting for about $31 trillion.

Financial Stability

“Greater transparency of these markets would be beneficial
for financial stability,” Chantal Hughes, a spokeswoman for
Michel Barnier, the EU’s financial services chief, said in an e-
mail.

“We are in particular concerned about excessive levels of
leverage, pro-cyclicality and concentration risks,” she said.
“We are looking into various practical ways to bring about more
transparency. However, no decision has been taken by the
commission yet.”

Aside from weighing transparency rules, the Brussels-based
commission is planning to legislate on how traders can use
collateral provided as part of a repo or securities lending
trade, according to the document.

Strategies in which a security is handed over as collateral
from one trader to another, only for the new holder to lend it
on again as part of a separate transaction, can leave the
financial system less resilient against crises, according to the
EU document.

“Interconnections between financial institutions and the
collateral transformation strategies implemented by certain
financial actors” mean that “the default of a large financial
institution may destabilize the securities markets,” the
commission says in the paper.

“Furthermore, the complex and opaque nature of these
markets makes it difficult to identify property rights” and to
“monitor risk concentration,” according to the document. The
turmoil unleashed by the failure of Lehman Brothers Holdings
Inc. in 2008 is evidence of this, it says.